Chinese Food Speculators

Speculators help stoke China’s food prices

By Olivia Chung

HONG KONG – The three great determinants of food prices – flood, drought and speculators – are helping to drive China’s inflation past the government’s full-year target to the highest in almost two years.

The Consumer Price Index, a key measure of inflation, rose 3.3% in July from a year earlier, 0.4 percentage points higher than the June increase and exceeding the government’s 3% full-year ceiling. It is the largest year-on-year increase since a 4% gain in October 2008.

The country’s worst floods in a decade, which have killed 1,454 people with hundreds more missing, and earlier winter drought, were factors in the summer grain output declining 0.3% year-on-year, the first fall in seven years.

Ye Tan, an economist and columnist, said price increases for agricultural products in the international market were closely related to “an interplay of capital” and local panic over a shortage of agricultural products due to cold weather during the growing season, “making speculators order more”.

Traders or businessmen who used to speculate on grain, wheat and rice, can no longer do so after the government set up a national grain reservoir system, which now stores nearly half of the annual grain output now. They have shifted to minor products that are less controlled, such as mung beans and garlic.

China has imported about 600,000 tonnes of rice from neighbor Vietnam so far this year and sought corn shipments of about one million tonnes from the United States in May, the biggest purchase in 14 years. More purchases are likely, Reuters reported, quoting the Thai Rice Exporters Association as saying China will probably buy up to 1.5 million tonnes of the grain this year. Reuters said a surprise purchase of corn by China pushed up the price of US corn futures up by more than 6%.

Global wheat futures prices are already soaring to the highest in two years after flooding devastated crops in Pakistan and wildfires in Russia prompted the Kremlin to ban grain exports for the rest of the year. Global rice prices are also rising. Thailand’s benchmark 100 percent B grade white rice rose 4% to $475 per tonne last week compared with a week earlier, exporters said. Vietnam’s 5% broken rice jumped to $400-$415 a tonne, free-on-board, last week from $375-$380 a week earlier.

Zhang Liqun, senior research fellow at the National Development Research Center of the State Council, told China Daily on August 12 that the grain price is not a major concern this year, as the country has ample staple reserves after reaping bumper harvests for six consecutive years.

With US wheat stocks this season projected by the US Department of Agriculture at about 30 million tonnes, the highest in 23 years this season, more than double the amount of wheat estimated lost to the Russian drought, Ye said futures prices have lost all touch with reality.

China Grain Reserves Corporation (Sinograin) is China’s major reserve manager, designated to buy wheat for the government as China, the world’s biggest grower of wheat, has set minimum buying prices for the crop, under which Sinograin will purchase the wheat when the market price is below the state-set price to protect Chinese farmers’ interests.

However, in China itself, since the beginning of this year, food including garlic, mung beans and vegetables have had unusually big price increases, which have increased public concern.

Li Xiaojuan, an office lady, said she was shocked recently when she was told the prices of eggs and vegetables in a market in Guangzhou, provincial capital of south China’s Guangdong.

“In the past, prices rose fen by fen,” she told Asia Times Online, referring to the Chinese equivalent of a cent. “But recently they rise yuan by yuan.” The yuan is worth about 15 US cents.

“The price of eggs hit 5.2 yuan per jin [0.5kg] yesterday, increasing by one yuan,” said the 32-year-old during her market shopping. “I am not the only one who grumbles about price rises. There are many owners complaining about the increasing prices at wholesale rates. They told me the average price of many kinds of vegetables have risen about 30% at wholesale rates due to the recent heavy rains.”

Mung beans, an important part of the Chinese diet, have held at 8 yuan per kg recently, about the same as the price of pork, after surging from 1.5 yuan per kg last autumn and spiking at around 20 yuan per kg in June. The average price across the country of garlic is now three times the usual 2 yuan per kg price at 7.2 yuan per kg, after peaking at 19 yuan a kg in mid-May.

While bad weather has played its role in driving up prices, many attribute part of the gains to speculation in agricultural products.

Dong Tao, chief Asia economist at Credit Suisse, said in a research note that the winter drought and summer floods resulted in a 2% decline in grain production from a year earlier, but “hot money” had been used to buy up physical agricultural products, making it difficult for the state to purchase direct from farmers.

Andy Xie, a Shanghai-based independent economist formerly with Morgan Stanley, blamed capital speculation, saying that some purchasers used the bad weather as an excuse to store agricultural products. As these are grown in limited areas, while demand is year round, their prices are easy to “stir fry” while the goods are kept in store.

Several exchanges and wholesalers around the country deal in different products, with mung bean futures being bought and sold on the Jilin Corn Center Exchange. This month, the National Development and Reform Commission (NDRC), the country’s top economic planner, released a tape recording containing evidence of mung bean price manipulation.

The tape recorded contents of an industry conference in Jilin last October of 100 dealers from across China, invited by the exchange, at which representatives called for hoarding of beans to raise their price. The exchange later fabricated a report claiming “output in major mung bean production regions fell 64.05% in 2009 year on year”, compared with the official figure of a 14.9% decrease, according to the NDRC.

The NDRC said a number of companies had been punished, including the Jilin exchange, receiving fines ranging from 500,000 yuan to one million yuan for their speculation to increase prices.

NDRC Vice Minister Peng Sen was quoted by Xinhua News Agency as saying that after the amount of cash in circulation rose last year due to the central bank’s loose monetary policy, some speculative capital had shifted to agricultural products such as mung beans and garlic.

The Ministry of Commerce and the State Administration for Industry and Commerce last month said they were considering doubling fines to up to two million yuan from the present one million yuan for price manipulation and hoarding of agricultural products.

Tao of Credit Suisse in a research note on August 10 also argued that food inflation has been driven by speculation. Even so, he said the government will be cautious about taking measures such as increasing interests rate to limit the amount of money in circulation in the near future as investment confidence remains fragile.

Industrial output growth in July slowed for a fifth month to 13.4% year-on-year, down from 13.7% in June. Fixed asset investment in urban areas, a measure of government spending on infrastructure, in the first seven months of the year rose 24.9%, down from 25.5% for the first half of the year. Retail sales, a key measure of consumer spending, rose 17.9% year on-year, down from 18.2% growth for the first half of the year.

Speculators help stoke China’s food pricesBy Olivia Chung
HONG KONG – The three great determinants of food prices – flood, drought and speculators – are helping to drive China’s inflation past the government’s full-year target to the highest in almost two years.
The Consumer Price Index, a key measure of inflation, rose 3.3% in July from a year earlier, 0.4 percentage points higher than the June increase and exceeding the government’s 3% full-year ceiling. It is the largest year-on-year increase since a 4% gain in October 2008.
The country’s worst floods in a decade, which have killed 1,454 people with hundreds more missing, and earlier winter drought, were factors in the summer grain output declining 0.3% year-on-year, the first fall in seven years.
Ye Tan, an economist and columnist, said price increases for agricultural products in the international market were closely related to “an interplay of capital” and local panic over a shortage of agricultural products due to cold weather during the growing season, “making speculators order more”.
Traders or businessmen who used to speculate on grain, wheat and rice, can no longer do so after the government set up a national grain reservoir system, which now stores nearly half of the annual grain output now. They have shifted to minor products that are less controlled, such as mung beans and garlic.
China has imported about 600,000 tonnes of rice from neighbor Vietnam so far this year and sought corn shipments of about one million tonnes from the United States in May, the biggest purchase in 14 years. More purchases are likely, Reuters reported, quoting the Thai Rice Exporters Association as saying China will probably buy up to 1.5 million tonnes of the grain this year. Reuters said a surprise purchase of corn by China pushed up the price of US corn futures up by more than 6%.
Global wheat futures prices are already soaring to the highest in two years after flooding devastated crops in Pakistan and wildfires in Russia prompted the Kremlin to ban grain exports for the rest of the year. Global rice prices are also rising. Thailand’s benchmark 100 percent B grade white rice rose 4% to $475 per tonne last week compared with a week earlier, exporters said. Vietnam’s 5% broken rice jumped to $400-$415 a tonne, free-on-board, last week from $375-$380 a week earlier.
Zhang Liqun, senior research fellow at the National Development Research Center of the State Council, told China Daily on August 12 that the grain price is not a major concern this year, as the country has ample staple reserves after reaping bumper harvests for six consecutive years.
With US wheat stocks this season projected by the US Department of Agriculture at about 30 million tonnes, the highest in 23 years this season, more than double the amount of wheat estimated lost to the Russian drought, Ye said futures prices have lost all touch with reality.
China Grain Reserves Corporation (Sinograin) is China’s major reserve manager, designated to buy wheat for the government as China, the world’s biggest grower of wheat, has set minimum buying prices for the crop, under which Sinograin will purchase the wheat when the market price is below the state-set price to protect Chinese farmers’ interests.
However, in China itself, since the beginning of this year, food including garlic, mung beans and vegetables have had unusually big price increases, which have increased public concern.
Li Xiaojuan, an office lady, said she was shocked recently when she was told the prices of eggs and vegetables in a market in Guangzhou, provincial capital of south China’s Guangdong.
“In the past, prices rose fen by fen,” she told Asia Times Online, referring to the Chinese equivalent of a cent. “But recently they rise yuan by yuan.” The yuan is worth about 15 US cents.
“The price of eggs hit 5.2 yuan per jin [0.5kg] yesterday, increasing by one yuan,” said the 32-year-old during her market shopping. “I am not the only one who grumbles about price rises. There are many owners complaining about the increasing prices at wholesale rates. They told me the average price of many kinds of vegetables have risen about 30% at wholesale rates due to the recent heavy rains.”
Mung beans, an important part of the Chinese diet, have held at 8 yuan per kg recently, about the same as the price of pork, after surging from 1.5 yuan per kg last autumn and spiking at around 20 yuan per kg in June. The average price across the country of garlic is now three times the usual 2 yuan per kg price at 7.2 yuan per kg, after peaking at 19 yuan a kg in mid-May.
While bad weather has played its role in driving up prices, many attribute part of the gains to speculation in agricultural products.
Dong Tao, chief Asia economist at Credit Suisse, said in a research note that the winter drought and summer floods resulted in a 2% decline in grain production from a year earlier, but “hot money” had been used to buy up physical agricultural products, making it difficult for the state to purchase direct from farmers.
Andy Xie, a Shanghai-based independent economist formerly with Morgan Stanley, blamed capital speculation, saying that some purchasers used the bad weather as an excuse to store agricultural products. As these are grown in limited areas, while demand is year round, their prices are easy to “stir fry” while the goods are kept in store.
Several exchanges and wholesalers around the country deal in different products, with mung bean futures being bought and sold on the Jilin Corn Center Exchange. This month, the National Development and Reform Commission (NDRC), the country’s top economic planner, released a tape recording containing evidence of mung bean price manipulation.
The tape recorded contents of an industry conference in Jilin last October of 100 dealers from across China, invited by the exchange, at which representatives called for hoarding of beans to raise their price. The exchange later fabricated a report claiming “output in major mung bean production regions fell 64.05% in 2009 year on year”, compared with the official figure of a 14.9% decrease, according to the NDRC.
The NDRC said a number of companies had been punished, including the Jilin exchange, receiving fines ranging from 500,000 yuan to one million yuan for their speculation to increase prices.
NDRC Vice Minister Peng Sen was quoted by Xinhua News Agency as saying that after the amount of cash in circulation rose last year due to the central bank’s loose monetary policy, some speculative capital had shifted to agricultural products such as mung beans and garlic.
The Ministry of Commerce and the State Administration for Industry and Commerce last month said they were considering doubling fines to up to two million yuan from the present one million yuan for price manipulation and hoarding of agricultural products.
Tao of Credit Suisse in a research note on August 10 also argued that food inflation has been driven by speculation. Even so, he said the government will be cautious about taking measures such as increasing interests rate to limit the amount of money in circulation in the near future as investment confidence remains fragile.
Industrial output growth in July slowed for a fifth month to 13.4% year-on-year, down from 13.7% in June. Fixed asset investment in urban areas, a measure of government spending on infrastructure, in the first seven months of the year rose 24.9%, down from 25.5% for the first half of the year. Retail sales, a key measure of consumer spending, rose 17.9% year on-year, down from 18.2% growth for the first half of the year.
Olivia Chung is a senior Asia Times Online reporter.
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